2. REVENUE RECOGNITION

3. Some Highlights and Examples from SAB 101

36. More Applications of Revenue Recognition

40. Individual film forecast method

44. Tradecity.com Tradecity.com is an internet-based retailer (e-tailer) with a high volume, low margin business strategy. Among its means of generating revenues is to sell ads to other e-tailers. It advertises also, both through traditional media, as well as key internet sites. In recent months, Tradecity.com has been in a tight liquidity situation, as have many others in the industry. Consequently, it has entered into several agreements to swap ads and other products with its customers.

45. How should Tradecity.com recognize revenues on these swaps? 1.Not at all. 2.It depends. On what?

46. Case 5-1 (pg. 268)

47. Requirement 1 A bill and hold strategy accelerates the recognition of revenue. In this case, sales that would normally have occurred in 1998 were recorded in 1997. Assuming a positive gross profit on these sales, earnings in 1997 is inflated.

48. Requirement 2 A customer would probably not be expected to pay for goods purchased using this bill and hold strategy until the goods actually were received. Therefore, Receivables would increase.

49. Requirement 3 Sales that would normally have been recorded in 1998 were recorded in 1997. This bill and hold strategy shifted sales revenue and, therefore, earnings from 1998 to 1997.

50. Requirement 4 Earnings quality refers to the ability of reported earnings (income) to predict a company’s future earnings. Sunbeam’s earnings management strategy produced a 1997 earnings figure that was not indicative of the company’s future profit-generating ability.

51. Case 5-8 (pg. 270)

52. [Excerpts from SFAS 46] 3. This Statement specifies criteria for recognizing revenue on a sale in which a product may be returned, whether as a matter of contract or as a matter of existing practice, either by the ultimate customer or by a party who resells the product to others. The product may be returned for a refund of the purchase price, for a credit applied to amounts owed or to be owed for other purchases, or in exchange for other products. The purchase price or credit may include amounts related to incidental services, such as installation.

53. 8. The ability to make a reasonable estimate of the amount of future returns depends on many factors and circumstances that will vary from one case to the next. However, the following factors may impair the ability to make a reasonable estimate: The susceptibility of the product to significant external factors, such as technological obsolescence or changes in demand; Relatively long periods in which a particular product may be returned; Absence of historical experience with similar types of sales of similar products, or inability to apply such experience because of changing circumstances, for example, changes in the selling enterprise's marketing policies or relationships with its customers; and Absence of a large volume of relatively homogeneous transactions. The existence of one or more of the above factors, in light of the significance of other factors, may not be sufficient to prevent making a reasonable estimate; likewise, other factors may preclude a reasonable estimate. STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING Factors that May Impair Reasonable Estimates of Returns

54. STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING Criteria for Recognizing Revenue When Right of Return Exists 6. If an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met: The seller's price to the buyer is substantially fixed or determinable at the date of sale; The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; The buyer's obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; The buyer acquiring the product for resale has economic substance apart from that provided by the seller; The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and The amount of future returns can be reasonably estimated (paragraph 8). Sales revenue and cost of sales that are not recognized at time of sale because the foregoing conditions are not met shall be recognized either when the return privilege has substantially expired or if those conditions subsequently are met, whichever occurs first.

55. Hewlett Packard Company Product is considered delivered, and revenue is recognized when title and risk of loss have been transferred to the customer. Under the terms and conditions of the sale, this may occur either at the time of shipment or when product is delivered to the customer. Revenue is reduced for estimated customer returns, price protection, rebates and other offerings that occur under sales programs established by HP directly or with HP's distributors and resellers.

56. Advanced Micro Devices, Inc. The Company recognizes revenue from product sold direct to customers when the contract is in place, the price is determined, shipment is made and collectibility is reasonably assured. The Company sells to distributors under terms allowing the distributors certain rights of return and price protection on unsold merchandise held by them. The distributor agreements, which may be canceled by either party upon specified notice, generally contain a provision for the return of the Company’s products in the event the agreement with the distributor is terminated and the distributor’s products have not been sold. Accordingly, the Company defers the net gross margin, resulting from the deferral of both revenue and related product costs from sales to distributors with agreements that have the aforementioned terms until the merchandise is resold by the distributors.

57. Why the difference? Reasons for the difference in policies could relate to the types of products sold by the two companies, the distribution channels, and the actual agreements with customers. 1.AMD sells semiconductors, a highly volatile industry. It may be more difficult for AMD to see through the distribution channels to reasonably estimate returns. 2.The agreements with distributors of AMD’s products may be more liberal than those of HP with respect to things like price protection and returns. For example, AMD might offer a longer time period for customers to return product than does HP. 3.AMD’s sales to distributors might be contingent on resale of the product to end users, one of the six criteria that must be met before revenue can be recognized when the right of return exists.